Interesting news came out December 14. Hydro Protocol announced that they are forking 0x, which immediately triggered community response, as well as some discussions on governance value capture and so on. This wrap-up is to fill you in on the situation and throw a couple of (hopefully) interesting points.
Introduction: who is who?
0x does not need an introduction, it has been around for quite a while. Hydro Protocol (HOT trading since January 2018), however, is not yet known to everybody. “Hydro is a network transport layer protocol for hybrid decentralized exchanges.” — this was the initial idea, a thin liquidity incentive layer on top of 0x. And then there is the third player in this game, DDEX.
Stats are taken on Dec 15 from Etherscan. DDEX is the second largest DEX on Ethereum.
DDEX is one of the relayers of 0x, leveraging both the 0x and the hydro protocol technology. It is a successful showcase product by the Hydro Protocol team. Here is how it combined the two:
«Probably the easiest way to think about it is that 0x handles the actual swap of the tokens. So when a trade occurs, we call the 0x smart contract (we’re on 0x v1). The way we handle our order book, the matching, and the liquidity sharing is all hydro protocol middleware.»
Just FYI, Delta Relay is another relayer on Hydro Protocol. Now you know who is who. Just to jump a bit ahead: you can look at 0x as a protocol built by the US powers, and Hydro Protocol (DDEX) — by Asia. Just have a look at the list of investors. This will be seen as relevant as we go on.
Hydro forking 0x — DDEX to switch
Then the story continues: on December 14 Hydro Protocol announced that they are forking 0x, and DDEX is to move onto it as soon as it is ready.
«We plan to ship a new order schema, an engine capable of true matching, robust market orders, and a fundamentally different liquidity sharing model. The ZRX token will be removed as well, because fee-based tokens create unnecessary friction.» — official statement by Hydro team on Medium.
0x team responded with their own statement regarding DDEX moving onto to Hydro, making emphasis on 0x v2.0 and the role of the ZRX token in governance. You can read it here.
This is the rough outline. Before we move further, I think it’s good to give you more context into the development progress of 0x and some opinions on it. Here is what Antonio Juliano, founder of dy/dx, wrote on Twitter a few days earlier — a great thread about DEXes actually.
Another interesting point is the role of the token, HOT, in the new ecosystem. Here is how the Hydro team describes it:
«New decentralized exchanges looking to bootstrap liquidity can stake HOT tokens to gain membership into existing liquidity pools. The specific amount for admission is set by the members of each individual pool. The only way to get back staked tokens is by contributing liquidity over time, providing additional incentive for all parties to contribute liquidity to the pool. Governance mechanisms will be provided for punishment of exploitative behaviors such as front-running. New exchanges typically bootstrap liquidity by inviting professional market makers onto the system. An individual exchange or a pool of exchanges can pre-allocate HOT tokens into a smart contract that dispenses pay to market makers based autonomously.»
While the team said that they will update docs on the functionality of the system, it seems like HOT will keep its role as outlined above. Actually, Paradex abandoned ZRX as a fee token 10 months ago (0x team’s response included: ‘ultimately, the community will decide how token economics work through the governance process and it will be interesting to see how this grand experiment evolves’.)
Now let’s get to the fun part: why and how.
Two cartels: is that what is behind?
ZRX token is supposed to eventually function as a governance token. The more ZRX you have, the heavier your voting power is. This functionality is not yet available, but we can already see the implications.
Now to the other side of the spectrum. I already mentioned that there are two different cartels standing behind 0x and Hydro Protocol. An interesting message was posted in DeFi chat on September 30:
«You got a16z/Coinbase on one side (the US) and the INB (China) on the other: the former got Paradex and the latter DDEX. Both sides have probably been stocking up on ZRX for governance influence.
— what governance decisions do u think will be the highest stakes?
Compliance re the exchange of tokenized securities for example. The US cartel (a16z) would want to be compliant n enshrine KYC-ed addresses in-protocol; the Chinese cartel (INB) says ‘no thanks’ leave it optional. INB loses the vote. INB forks 0x and piggies back on 0x’s core dev manhours and just merges future update selectively as desired. INB got enough cash to bootstrap their fork with massive liquidity and dominates Asia market particularly. Maybe.»
This is so on point considering the events that happened with the fork. Sounds pretty convincing, right? There are two different sides, and with the majority of token holdings they can influence the direction 0x will go in.
«INB is one of our 30 investors. Xiaolai took a vocation for the past half year from the fund management. The decision is from us instead of INB. — reply from Bowen, team member of Hydro/DDEX.»
There is a very interesting product-oriented discussion here. Read it.
It’s really interesting not only from the DEX-product perspective but also how the value capture of a governance token can function. If the ZRX governance would already be in place, perhaps we would have seen a huge PnD prior to the decision taking place, because two cartels would start fighting. This is a good lesson for projects to take into consideration, for example, MakerDAO and Aragon.
This is something Vitalik talked about at the end of last year (The Role of Coin Voting), and what CoinFund posted just a few days ago. My 50 cents (please don’t sue for trademark here): blockchain governance is still very sharp around the edges, and coin voting does not seem like the best fit.
The Hydro team said they will be releasing more news on Monday, December 17. Let’s see what they have in stock for us!